Section 23038(a) - "Corporation" Defined(1) Scope of Definition. The term "corporation" applies to all corporations, other than corporations specifically exempt under Article 1, Chapter 4, or under the provisions of Article XIII of the Constitution of the State of California. Corporations and limited liability companies classified as an association for California income and franchise tax purposes which are qualified to do or are "doing business" in this State, and domestic corporations not otherwise taxed under this part, are subject to the tax imposed under Chapter 2. See Sections 23028 and 23151- 23155 of the Revenue and Taxation Code and Reg. § 23151. Unless specifically exempted, foreign corporations engaged exclusively in interstate commerce, holding companies and unincorporated associations are subject to the tax imposed under Chapter 3 on income derived from sources within this State. See Reg. § 23501 and Reg. § 23504. Generally, banks are included in the definition of "corporation," but they are taxable in a different manner. The law contains special provisions for determining and computing the rate and applicable provisions.
(2) Corporations Under Chapter 3. For the purpose of the tax imposed under Chapter 3 the term "corporation" is not limited to incorporated bodies, nor does it include all incorporated bodies. Banking associations are excluded from the meaning of the term, and associations, business trusts, and other business entities classified as associations under Regs. § 23038(b) - 1 to § 23038(b) - 3 are included in its meaning.(3)(A) Ordinary trusts. In general, the term "trust," as used in the Personal Income Tax Law, refers to an arrangement created by a will or by an inter vivos declaration whereby trustees take title to the property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery and probate courts. The beneficiaries of such a trust generally do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust under the Revenue and Taxation Code if it was created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Generally speaking, an arrangement will be treated as a trust under the Revenue and Taxation Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.(B) Business trusts. There are arrangements which are known as trusts because the legal title to property is conveyed to trustees for the benefit of beneficiaries, but which are not classified as trusts for purposes of the Revenue and Taxation Code because they are not simply arrangements to protect or conserve the property for beneficiaries. These trusts, which are often known as business or commercial trusts, generally are created by the beneficiaries simply as a device to carry on a profit-making business which normally would have been carried on through business organizations that are classified as corporations or partnerships under the Revenue and Taxation Code. However, the fact that the corpus of the trust is not supplied by the beneficiaries is not sufficient reason in itself for classifying the arrangement as an ordinary trust rather than an association or a partnership. The fact that any organization is technically cast in the trust form, by conveying title to property to trustees for the benefit of persons designated as beneficiaries, will not change the real character of the organization if the organization is more properly classified as a business entity under Reg. § 2 3038(b) - 2.(C) Certain investment trusts. An "investment" trust will not be classified as a trust if there is a power under the trust agreement to vary the investment of the certificate holders. An investment trust with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust, will be classified as a trust if there is no power under the trust agreement to vary the investment of the certificate holders. An investment trust with multiple classes of ownership interests will ordinarily be classified as an association or a partnership under Reg. § 23038(b) - 3; however, an investment trust with multiple classes of ownership interests, in which there is no power under the trust agreement to vary the investment of the certificate holders, will be classified as a trust if the trust is formed to facilitate direct investment in the assets of the trust and the existence of multiple classes of ownership interests is incidental to that purpose.(D) Liquidating trusts. Certain organizations which are commonly known as liquidating trusts are treated as trusts for purposes of the Revenue and Taxation Code. An organization will be considered a liquidating trust if it is organized for the primary purpose of liquidating and distributing the assets transferred to it, and if its activities are all reasonably necessary to, and consistent with, the accomplishment of that purpose. A liquidating trust is treated as a trust for purposes of the Revenue and Taxation Code because it is formed with the objective of liquidating particular assets and not as an organization having as its purpose the carrying on of a profit-making business which normally would be conducted through business organizations classified as corporations or partnerships. However, if the liquidation is unreasonably prolonged or if the liquidation purpose becomes so obscured by business activities that the declared purpose of liquidation can be said to be lost or abandoned, the status of the organization will no longer be that of a liquidating trust. Bondholders' protective committees, voting trusts, and other agencies formed to protect the interests of security holders during insolvency, bankruptcy, or corporate reorganization proceedings are analogous to liquidating trusts, but if subsequently utilized to further the control or profitable operation of a going business on a permanent continuing basis, they will lose their classification as trusts for purposes of the Revenue and Taxation Code.(E) Environmental remediation trusts. 1. An environmental remediation trust is considered a trust for purposes of the Revenue and Taxation Code. For purposes of this subsection (E), an organization is an environmental remediation trust if the organization is organized under state law as a trust; the primary purpose of the trust is collecting and disbursing amounts for environmental remediation of an existing waste site to resolve, satisfy, mitigate, address, or prevent the liability or potential liability of persons imposed by federal, state, or local environmental laws; all contributors to the trust have (at the time of contribution and thereafter) actual or potential liability or a reasonable expectation of liability under federal, state, or local environmental laws for environmental remediation of the waste site; and the trust is not a qualified settlement fund within the meaning of Treas. Reg. § 1.468 B-1(a), as applicable for California income and franchise tax purposes pursuant to Sections 23051.5 and 24693 of the Revenue and Taxation Code. An environmental remediation trust is classified as a trust because its primary purpose is environmental remediation of an existing waste site and not the carrying on of a profit-making business that normally would be conducted through business organizations classified as corporations or partnerships. However, if the remedial purpose is altered or becomes so obscured by business or investment activities that the declared remedial purpose is no longer controlling, the organization will no longer be classified as a trust. For purposes of this subsection (E), environmental remediation includes the costs of assessing environmental conditions, remedying and removing environmental contamination, monitoring remedial activities and the release of substances, preventing future releases of substances, and collecting amounts from persons liable or potentially liable for the costs of these activities. For purposes of this subsection (E), persons have potential liability or a reasonable expectation of liability under federal, state, or local environmental laws for remediation of the existing waste site if there is authority under a federal, state, or local law that requires or could reasonably be expected to require such persons to satisfy all or a portion of the costs of the environmental remediation.2. Each contributor (grantor) to the trust is treated as the owner of the portion of the trust contributed by that grantor under rules provided in Section 677 of the Internal Revenue Code and Treas. Reg. § 1.677(a) - 1(d), as applicable for California income and franchise tax purposes pursuant to Sections 17024.5 and 17731 of the Revenue and Taxation Code. Section 677 of the Internal Revenue and Taxation Code and Treas. Reg. § 1.677(a) - 1(d) provide rules regarding the treatment of a grantor as the owner of a portion of a trust applied in discharge of the grantor's legal obligation. Items of income, deduction, and credit attributable to an environmental remediation trust are not reported by the trust on California income tax return of the trust (Form 541 or any successor form), but are shown on a separate statement to be attached to that form. See Treas. Reg. § 1.671-4(a). The trustee must also furnish to each grantor a statement that shows all items of income, deduction, and credit of the trust for the grantor's taxable year attributable to the portion of the trust treated as owned by the grantor. The statement must provide the grantor with the information necessary to take the items into account in computing the grantor's taxable income, including information necessary to determine the federal tax treatment of the items (for example, whether an item is a deductible expense under Section 162(a) of the Internal Revenue Code, as applicable for California income and franchise tax purposes, or a capital expenditure under Section 263(a) of the Internal Revenue Code, as applicable for California income and franchise tax purposes) and how the item should be taken into account under the economic performance rules of Section 461(h) of the Internal Revenue Code and the regulations thereunder, as applicable for California income and franchise tax purposes pursuant to Sections 17024.5, 17551, 23051.5, and 24681 of the Revenue and Taxation Code. See Treas. Reg. § 1.461-4 for rules relating to economic performance.3. All amounts contributed to an environmental remediation trust by a grantor (cash-out grantor) who, pursuant to an agreement with the other grantors, contributes a fixed amount to the trust and is relieved by the other grantors of any further obligation to make contributions to the trust, but remains liable or potentially liable under the applicable environmental laws, will be considered amounts contributed for remediation. An environmental remediation trust agreement may direct the trustee to expend amounts contributed by a cash-out grantor (and the earnings thereon) before expending amounts contributed by other grantors (and the earnings thereon). A cash-out grantor will cease to be treated as and owner of a portion of the trust when the grantor's portion is fully expended by the trust. Effective Date: This regulation applies to taxable or income years beginning on or after January 1, 1997.
Cal. Code Regs. Tit. 18, § 23038(a)
1. New section filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28).
2. Amendment of section and NOTE filed 4-3-96; operative 5-3-96 (Register 96, No. 14).
3. Amendment of section and NOTE filed 1-9-98; operative 1-9-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 2). Note: Authority cited: Sections 19503 and 23038, Revenue and Taxation Code. Reference: Sections 17024.5, 17551, 17731, 17954, 23038, 23040, 23051.5, 24651, 24667, 24668.1, 24672, 24673, 24681 and 24693, Revenue and Taxation Code.
1. New section filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28).
2. Amendment of section and Note filed 4-3-96; operative 5-3-96 (Register 96, No. 14).
3. Amendment of section and Note filed 1-9-98; operative 1-9-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 2).